StarHub may fail to raise dividends

Spectrum cost to push up 2013 cash needs by 43-51%, says KimEng.

According to Gregory Yap, analyst at KimEng, StarHub may need to pay SGD110-131m for refarmed 4G spectrum using past auctions to provide a pricing benchmark.

"An auction is likely to be held in 1H 2013. This could bump up 2013 cash requirements by 43-51% and push 2013 net debt/EBITDA from 0.63x to 0.78-0.81x. While this should not endanger its current SGD0.20 DPS, it may undermine our original thesis that StarHub can afford to increase its dividends," he said.

Here's more from Yap:

Our long-standing buy call on StarHub has been rewarding. However, it is time to say goodbye and we advise clients to take profit.

The stock has raced to an all-time high amidst the current risk-off environment and its dividend yield has compressed to the lowest level since listing.

Going by our DDM model, the share price has already discounted a 20% rise in dividends, but our original expectations of higher dividends may be dashed by an upcoming 4G spectrum auction in 2013.

Management has also indicated there will be no capital management or reduction initiatives. Assuming dividends stay flat at SGD0.20 a share, our DDM-derived target price is SGD3.04 or 15% below the current level.

StarHub has almost reached our DDM-derived TP of SGD3.64, which had assumed a 20% rise in annual dividends to SGD0.24 a share. However, the 4G spectrum auction in 2013 may lead to a rise in cash commitment next year, which could reduce the company’s willingness to increase dividend payout. If dividends stay put at the current SGD0.20 a share, the stock is now overvalued, with a DDM-derived TP of SGD3.04.

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